Mainstreaming Impact Investing 2012

Mainstreaming Impact Investing is a continuation of the Forum’s multi-year initiative on sustainable and impact investing. The objective is to identify in what ways impact investing may be a feasible strategy for certain traditional and mainstream investors and, where suitable, what factors are required to accelerate the flow of capital to impact investments from such investors.

To accomplish this objective, the World Economic Forum team will:

Bring together experts from the impact investing industry to collaborate and share insights

Work with traditional investors (e.g. institutional investors), policy-makers and others who are less familiar with impact investing to evaluate existing challenges and potential solutions

At the World Economic Forum Annual Meeting 2012, mainstream investors, impact investors and social entrepreneurs convened to discuss and consider:

Ways in which double bottom-line investment opportunities can appeal to institutional investors

The challenges institutional investors face when trying to fit sustainable and impact investment into their existing portfolio

Ways to craft lucrative investment strategies that do well by doing good

The interactive nature of the game structure was intended to increase participant engagement

Participants from a variety of backgrounds (traditional investing, impact investing, academia, philanthropic foundations and social entrepreneurship) shared their thought process, which served to break down silos among the different stakeholder groups

The aim of the game was to develop a double bottom line strategy for a fictional company. Participants had to modify the strategy according to several surprise interventions. Using a game format led to new insights related to 1. the constraints faced by different stakeholders due to their fiduciary responsibilities or the people to whom they are accountable and 2. how demographic changes (expected money transfer to more socially and environmentally conscious millennial generation) will affect investment decisions and business practices.

Participants were divided into six teams of eight people from diverse backgrounds. Approximately one-quarter of participants were social entrepreneurs and half represented mainstream investors. Participants were instructed to form diverse groups, ensuring both impact-first and finance-first backgrounds were well-represented.

To replicate this in a different setting (e.g. a classroom), we suggest using the following tactics:

Ask participants to self-identify as either impact-first or finance-first. Another option (of if one group turns out to be significantly larger) is to ask participants to count off and assign roles

Then ask participants to form groups where both roles are well-represented

We recommend creating four to eight teams of five to eight people

T+1

Step 2: Work with two fictitious company profiles

Each group was provided with one of two fictitious company profiles and instructions for company turnaround. Participants were given 30 minutes to develop a two-minute elevator pitch.

Company 1: A social business --> Challenge: Develop a pitch to a philanthropist to fund business expansion

Company 2: A traditional profit-only business --> Challenge: Develop a pitch to potential commercial investors to fund business expansion

T+15

Step 3:Incorporate interruption 1

Halfway through the game, it was announced that the interested party (to whom the participants would pitch) in this turnaround would be a fictitious pension fund.

Interruption 1: The pension fund follows strict environmental, social and governance (ESG) guidelines. In order to receive investment, the profit-only company would need to incorporate ESG standards, and the social business would need to become financially profitable.

Participants were given 30 more minutes to finalize their pitch to the pension fund’s advisory committee.

T+40

Step 4: Incorporate interruption 2

Five minutes before the pitch, it was announced that the pension fund has nominated a special advisory board of five millennials to make a recommendation to its investment committee. These five people have not participated in the game and were brought into the room before the pitch.

This can be replicated by selecting several people who would be outside the room for most of the game, and would only participate as members of the advisory board at the end. To maintain an element of surprise, it is important that the rest of the group do not know why these people have left the room. The selected participants will act as socially and environmentally conscious millennials.

T+45

Step 5: Pitch strategy

Each team selected one representative to make the pitch to the millennial advisory board.

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Step 6: Select a winner

The pension fund’s advisory committee decided which team came up with the most appealing approach to the challenge.

T+80 -> T+120

Step 7: Debrief and share insights as a group

Each team’s pitch was discussed by all participants in a moderated group conversation.

Each group worked with one of the following fictitious companies and corresponding interventions:

Scenarios

Scenario 1: Shaba

Background

You are the Monaco-based 100% owner of Shaba, a copper mine in Tanzania. All your funds are invested in the mine, and you have no further capital. Shaba is a stable operation that produces 50,000 tons of copper per annum, with production forecast at those levels for another 30 years. The mine started as an open pit mine, but most of the new production will be underground. Shaba employs 1,500 local staff in Tanzania, and is the only major employer in the local villages surrounding the mine. You have managed the mine for cash flow, generating about $20 million in profits per annum. As a consequence, you have not invested in new equipment for a decade.

The Situation

During routine blasting, Shaba has quite literally struck gold, discovering a strong vein that is predicted to produce 10 tons per annum for the next 10 years. As your own capital does not allow for funding this extraction, you are looking for an investor to bring $1 billion to the table. The funds would cover an upgrade to your existing equipment at $200 million (making the copper extraction more efficient and boosting profits by $30 million per annum), the purchase of specialist equipment to extract the gold for $500 million, and investment in joint infrastructure (such as water supply for cooling and railroads to improve transport links) at $300 million. This is a crucial opportunity, as you fear that without this investment, profitability of the copper mine will gradually deteriorate.

Your Challenge

Develop a pitch to potential investors for $1 billion to fund the expansion and diversification of Shaba. The pitch should be approximately two minutes.

Copper and Gold Markets

Copper is used extensively as a heat and electrical conductor, as well as a component in metal alloys. World production in 2008 was 18.4 million tons.

Copper is a globally traded commodity, with significant price volatility. Recently, demand has been high, with China the major buyer. Prices in December 2011 were $7,600 per ton.

Gold is used in jewellery, electronics and coinage. It is widely considered to be an effective hedge against inflation. In 2008, world production was 2.3 million tons.

Gold is a globally traded commodity, with much lower volatility than copper and a more diversified set of buyers. Recently, demand has been high as investors have sought a safe haven in the financial crisis. Prices in December 2011 were $52.5 million per ton ($1,600 per troy ounce).

Surprise Intervention (after 15 minutes)

You have strong indications from your fundraising agent that there is only one potential investor – a Dutch pension fund. They will commit $1 billion, but have one condition. Recently, they have made a public commitment to sustainable investing along ESG criteria, and you must modify your pitch accordingly. From your records, you discover that:

Shaba has a good safety record with only minor accidents in the past 10 years

Shaba’s relations with the surrounding villages are good, but this is purely based on your knowledge as an employer and wage payer

Your corporate structure consists of a chief executive officer (appointed 10 years ago and also serves as chief financial officer) and a chief operating officer who oversees daily operations. There is no board. You have a permanent worker’s representative, who was appointed by the chief executive officer two years ago based on his extraordinary performance as a foreman.

This is clearly not going to be good enough to secure the investment. How will you modify your operations and therefore your pitch to win this crucial investor for Shaba?

TrashIt is a Johannesburg-based business that provides waste management services through community-operated franchises, in urban areas across Africa, Asia and Latin America.

TrashIt has over 5,000 informal waste collectors, offering them stable employment. It has also improved health and living conditions for 100 million people living in urban areas around the world. TrashIt collects household waste and composts it into organic fertilizer and biogas. It arranges for fertilizer companies to purchase and market the compost-based bio-fertilizers nationally. Each year, TrashIt produces 7,500 tons of compost, while fertilizer companies estimate that annual farming demand has risen to 50,000 tons. The technology used for composting can treat up to 35,000 tons of waste annually, while also reducing emissions by 20,000 tons of carbon dioxide.

TrashIt’s payment rates from customers for neighbourhood and business waste management are consistently over 80%. For other companies who do not work with local microentrepreneurs, the payment rates are below 40%. TrashIt’s services are more dependable and less expensive than those of its competitors. In addition to individuals paying for these services in cities around the world, some governments are beginning to use TrashIt as a private contractor to replace inefficient and ineffective waste management. This presents a large revenue opportunity.

So far, the company has been roughly breaking even under your strategy of “doing well by doing good”. You hope one day to be the largest sanitation company in the world, and one of the most admired businesses that has a positive social, environmental and economic impact. You think you can fund a slow expansion through retained profits and a small ($3 million to $5 million) contribution from a philanthropist.

Challenge

Develop a pitch for a philanthropist to help with TrashIt’s expansion, which aims to reach more than 200 million people. The pitch should be approximately two minutes.

Per capita waste generation in major Indian cities ranges from 0.2 kg to 0.6 kg

Waste collection efficiency in Indian cities ranges from 50% to 90%

Out of the total municipal waste collected, an average of 94% is dumped on land and 5% is composted

(1) India’s population was 1.04 billion in 2002. It is projected to be 1.3 billion in 2015.

Social Impact of TrashIt

Before TrashIt worked in the urban areas of these cities, trash collectors earned $1.50 a day. Trash collectors who work with the TrashIt community franchise now earn $3 a day (after 18 months of employment)

The school attendance rate of children of trash collectors increased from 45% to 75% (based on studies from parents who have been working with TrashIt for more than six months)

The incidence of waterborne diseases reported by hospitals and community medical clinics declined from 25% to 8% within one year of TrashIt entering the market

Surprise Intervention (after 15 minutes)

You are approached by the Public Pension Fund of India. They want to invest capital to create a local subsidiary of TrashIt, to be operational within a year. You know that by 2050, 70% of the world’s population will be urban; most of the urban growth will be in less developed countries (2). This is an unparalleled opportunity to get established in India and achieve your goal of serving 200 million people.

Your team has crunched the numbers and estimates it will need $50 million to expand TrashIt into India at speed. This is beyond the reach of philanthropists in your network, so the pension fund is your only realistic source of funds. You find out the minimum hurdle rate for the Public Pension Fund of India is 10% ROI. Competition is fierce and you are up against another company that will provide 12% ROI, but with little or no social impact.

You are confident that your position as a company providing a myriad of community benefits should appeal to the pension fund (which it does), but the fund has made it clear that they must also protect the financial interests of their pensioners. Your existing business model can generate $2.5 million of profits from this expansion (5% ROI). Your projected cost base is $15 million, of which 20% will be wages for trash collectors.

Now you need to figure out a way to modify your plan to double your projected ROI to be considered for funding to reach your goals.

How will you tailor your pitch to win this crucial investor for TrashIt? How can you create economic value without compromising your social impact?

The following are some potential “nudges” that can be used in the first 15 minutes of the discussion:

It’ll be early in the morning and the coffee might not have energized the participants – so your biggest job as discussion leader might be to raise the energy levels!

This is all about expanding reach and therefore social impact. The business model is proven (and economically viable, though not super profitable), so there is no real need to change it

You assume that your investor will not demand any different economics/returns from what you provide today – maybe a little scale economy as you defray fixed overhead over a larger base, but nothing dramatic

The focus should therefore be on the information about social impact in the handout, and you’ll centre your pitch around that

The following are some potential “nudges” that can be used after the surprise intervention (please do not share with the group):

This now requires a significant change in the business model, and the big question is how you will meet expectations for the financial rate of return through your various monetization avenues.

The easy option will be to monetize your CO2 reductions via carbon credits – but even at a maximum potential of 20,000 tons this gives you only $400,000 ($20 x 20,000) or thereabouts (at a carbon price of $20/ton, which is pretty realistic).

Another creative way to boost ROI will be to ask the Government of India (or select municipalities, as you can focus on a relatively small number of cities to achieve the target) to partially subsidize the TrashIt expansion, making the ROI higher for the pensioners at the same time that TrashIt is serving an important public need more efficiently than public services. If you were to get a $10 million subsidy, your profit gap for a 10% ROI will only be $1.5 million. Add the carbon credits to this, and you need to find $1.1 million.

After this, you’re left with more traditional “capitalist avenues” (you don’t have information for those):

Increase community trash collection charges so they are in line with commercial collection charges. Since there are so many community benefits, you expect that the community would still be happy to pay for the service.

Extract more revenue from the farmers until you match commercial prices for fertilizer – this is likely to be more contentious.

Reduce wages for trash collectors compared to your existing business model – this will also be contentious. But it would have a big impact – for 5,000 staff at $3/day, the wage bill is $3 million.

Another way of looking at it is that the projected cost base will be $15 million, and 10% of that is $1.5 million – nearly in line with your profit gap. A cost reduction of 10% is normally within scope of a focused budget exercise, so you might be able to get there by economizing on supplies, getting preferential vendor terms, etc., but some of this will still affect your impact footprint.

Overall, you will need to make some tough decisions to be able to achieve the economic goal while maintaining your social mission (assuming you decide to pursue this investment opportunity).

If you plan to use this content for your own simulation, please let us know (ImpactInvesting@weforum.org). We are interested in finding out how the information is being used and whether we can provide guidance.